Consumer Discretionary Sector
February 2nd, 2010
Sekhar Achanta,Tongyu Zhou
Recommendation
•
•
•
The Fund should underweight this sector when compared to S&P 500
index.
The Fund should rebalance the sector by selling some retail sector stocks.
We see 20% - 50% returns in some select industries in this sector.
• Automobile and components
• Internet & Catalog Retail
•
•
•
Major positives for this sector is improvement is Consumer Confidence.
Biggest risk - Unemployment.
We recommend that the Fund should rebalance by selling 300 basis points
of retail stocks in this sector and buy 300 basis points of automobile and
components industry stocks and Internet and Catalog Retailing to keep the
SIM weighting relative to the S&P500 at 6.99%.
S & P 500 Sector Weights (as of
1/27/2010)
Sector
Current Index
Weight
Current SIM
Weight
Consumer Discretionary
10.15%
6.99%
Consumer Staples
10.49%
11.66%
Energy
10.88%
11.90%
Financials
14.91%
11.37%
Health Care
12.63%
14.30%
Industrials
10.83%
12.36%
Information Technology
19.41%
19.04%
Materials
3.85%
3.46%
Telecommunication
Services
2.88%
3.27%
Utilities
3.95%
2.94%
Consumer Discretionary - Sector Details
• The Consumer Discretionary Sector encompasses
industries that tend to be the most sensitive to economic
cycles.
• Consumer Discretionary Sector manufacturing segment
includes automotive, household durable goods, textiles &
apparel and leisure equipment.
• The services segment includes hotels, restaurants and
other leisure facilities, media production and services,
and consumer retailing and services.
• Sector Size - The Market cap of the sector is $28.6
billion in the S & P 500 index.
• The Total Market Cap of the sector is $2 Trillion.
Consumer Discretionary - Industries
• There are 33 sub-industry indices in this sector, with
Movies & Entertainment being the largest, at 15.2% of
the sector's market value.
• Industries in this sector
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–
–
–
–
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–
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Auto Components
Automobiles
Distributors
Diversified Consumer Services
Hotels, Restaurants and Leisure
Household Durables
Internet & Catalog Retail
Media
Multiline Retail
Specialty Retail
Textiles, Apparel & Luxury Goods
Source: http://eresearch.fidelity.com/eresearch/markets_sectors/sectors/sectors_in_market.jhtml?tab=industries&sector=25
Consumer Discretionary Sector- Top 10 holdings
Source: https://www.spdrs.com/product/fund.seam?ticker=XLY
Sector Performance YTD and QTD
Consumer Discretionary Sector And Economic Cycles
Financials
Utilities &
Telecom
Technology
Consumer
Discretionary
Healthcare
Consumer
Staples
Industrials
Energy
Materials
Source: http://seekingalpha.com/article/178437-sector-performance-and-the-economic-cycle
Fed Stimulus –Fed Funds Rate
US Real GDP Growth
US Unemployment Numbers
Personal Savings Rate
Disposable Income
Consumer Confidence Index
Change In Consumption
Real Consumer Spending
Consumer Spending: Ex-Housing, Bills and Auto
Retail Sales
Consumer Discretionary –Same Store Sales
Correlation Coefficient R
Consumer Spending Vs. Consumer Confidence
Correlation Coefficient R
Consumer Spending Vs. Employment Rate
Correlation Coefficient R
Consumer Spending Vs. Unemployment Rate
Correlation Coefficient R
Consumer Spending Vs. CD Sector Performance
Consumer Discretionary Sector Revenues
Consumer Discretionary Sector Earnings Growth Rates
Consumer Discretionary Industries – Revenues and
Earnings Growth Rates
Industry
Revenue Growth (5 Year)
Earnings Growth(5 Year)
Auto Components
(-25)%
40%
Automobiles
(-13)%
n/a
Distributors
5%
4%
Diversified Consumer Services
n/a
n/a
Hotels, Restaurants and Leisure
15%
8%
Household Durables
4%
2%
Internet & Catalog Retail
18%
27%
Media
9%
8%
Multiline Retail
5%
2%
Specialty Retail
6%
4%
Textiles, Apparel & Luxury Goods
0%
(-2%)
Consumer Discretionary Top 10 Companies – Revenues,
Earnings, Margins and FCF
Companies
Revenue
(5 Year)
Earnings
(5 Year)
Margins
Free Cash Flow
McDonald's Corp.
3%
19%
33.6%
1.14%
Walt Disney Co.
4%
13%
10.6%
0.58%
Home Depot Inc.
(-3%)
(-9%)
14.6%
0.40%
Comcast Corp
14%
29%
8%
0.82%
Amazon.com
29%
26%
28.8%
0.94%
Target Corp.
7%
5%
15.1%
1.9%
Ford Motor Company
n/a
n/a
n/a
n/a
Time Warner Inc.
n/a
4%
7%
2.94%
Lowe's Cos.
5%
(-3%)
9.3%
0.03%
DIRECTV Group Inc.
13%
48%
24.4%
1.16%
Consumer Discretionary Earnings
Consumer Discretionary Sector MarginsRelative to S&P 500
Consumer Discretionary Sector- FCF Generation
Compared to S&P
Consumer Discretionary Sector – ROE
Valuation Analysis - Sector Valuation
Absolute Basis High
Low
Median
Current
P/Trailing E
53.7
17.2
21.0
35.1
P/Forward E
44.1
15.9
19.3
16.1
P/B
4.7
1.5
2.4
2.4
P/S
1.0
0.4
0.9
0.8
P/CF
14.3
5.7
9.2
8.8
Relative to
SP500
P/Trailing E
High
Low
Median
Current
3.9
0.69
1.2
1.9
P/Forward E
3.0
0.75
1.1
1.2
P/B
1.1
0.7
0.8
1.1
P/S
.7
.4
.6
.7
P/CF
1
.7
.8
.9
P/B Relative to S&P 500
P/S Relative to S&P 500
P/CF Relative to S&P 500
Forward P/E Relative to S&P 500
Recommendation
•
•
•
The Fund should underweight this sector when compared to S&P 500
index.
The Fund should rebalance the sector by selling some retail sector stocks.
We see 20% - 50% returns in some select industries in this sector.
• Automobile and components
• Internet & Catalog Retail
•
•
•
Major positives for this sector is improvement is Consumer Confidence.
Biggest risk - Unemployment.
We recommend that the Fund should rebalance by selling 300 basis points
of retail stocks in this sector and buy 300 basis points of automobile and
components industry stocks and Internet and Catalog Retailing to keep the
SIM weighting relative to the S&P500 at 6.99%.
Questions